Margin trading allows traders to open positions with leverage. Leverage is the ability to control a large amount of capital using very little of your own capital, and is available on most traditional exchanges.
For example, if you had $1,000 and wanted to buy $10,000 worth of a stock or cryptocurrency, you would need to find someone who was willing to loan you the $9,000 needed to complete the purchase. This is where margin comes in.
When you margin trade on an exchange, the exchange lends you the money needed to complete your trade. The amount of money that you can borrow is determined by the exchange and is usually a multiple of your account equity.
For example, if you have $1,000 in your account and the exchange offers 4x leverage, you can borrow up to $4,000.
The advantage of margin trading is that it allows you to make bigger trades than you would be able to do with just your own capital. This can lead to bigger profits if your trade goes well, but it also carries more risk as a bad trade can result in losses that exceed your account balance.
Before margin trading on an exchange, it’s important to understand how the exchange calculates margin and what fees are associated with margin trades. Some exchanges use a simple interest rate calculation while others use a more complex funding rate model.
It’s also important to understand how liquidations work on the exchange as this is how your position will be closed if it goes against you and you are unable to meet a margin call.
Coinbase uses a simple interest rate calculation for margin trades and charges a 0.5% fee for each side of the trade (buy and sell). Coinbase also employs what’s known as a makers-takers fee schedule where makers (the person who creates the order) are charged less than takers (the person who fills an order).
For example, at the time of writing this article maker fees were 0% and taker fees were 0.3%.
If you’re thinking about margin trading on Coinbase or any other exchange, be sure to do your research and understand all of the risks involved before putting any money at risk.